Taxation of property transactions
in Slovakia
Mark Gibbins, Partner
10 November 2005
TAX
Taxation of property transactions in Slovakia
Key general features of Slovak taxation
Peculiarities of Slovak tax system
Acquisition and disposal of property
Funding of acquisition
Tax depreciation
Restructuring of property holdings
Real estate tax
VAT
The future?
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Key general features of Slovak taxation
The 19% flat rate
No tax on dividends
Transfer pricing still in its infancy
No wealth tax, gift tax or inheritance tax
No real estate transfer tax from 1 January 2005
(progressive reduction from 20%)
Aim of simplified coherent tax structure only partly
achieved
Tax rulings more widely available than previously
VAT aligned with EU requirements
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Peculiarities of Slovak taxation
Security tax and Permanent Establishments
Narrow definition in practice of costs related to taxable
income?
Lack of detailed anti-avoidance legislation (e.g. no CFC
rules and general substance over form concept is
limited)
No fiscal grouping
BUT many of the unusual features have gone (e.g.
restrictions on carry forward losses, deduction for
costs only if paid, restrictions on deductible
advertising costs)
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Acquisition and disposal of property
Purchase of shares or assets?
Shifting of the equation in recent years
For vendor less incentive to sell shares than previously due to
- elimination of transfer tax
- reduction in tax rates
- flexibility in tax loss regime
- loss on disposal of assets (except land) now tax deductible
BUT For vendor still in many cases tax efficient to sell shares
- to avoid tax altogether at 19% on gain (sale of shares by foreign
owner not taxed in Slovakia under most double tax treaties)
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Acquisition and disposal of property
For purchaser normally asset purchase preferred since achieves
step up in value and avoids acquiring “history of company” but
share purchase can give access to tax losses
Other structures can be considered such as de-mergers,
contributions in kind as part of the planning process. These will
often lead to accounting (but not tax) step up in value.
Likely increasing use of direct ownership from abroad /
partnership structures driven by foreign tax planning
Key issue in all cases is to plan exit strategy in advance !
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Funding of acquisition
Debt or equity decision
Relatively low tax rates in Slovakia
Therefore debt preferable only if lower tax rate / tax shelter for
interest income abroad
Debt
Interest tax deductible for income tax purposes (subject to test of
relating to taxable income)
Transfer pricing - arm’s length principle in case of related parties
(extension to unrelated parties for tax driven transactions)
No withholding tax under EU Interest and Royalties Directive and
many double tax treaties
No thin-capitalization rules
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Tax depreciation
Land not depreciable for tax purposes
Buildings and other constructions tax depreciable over
20 years (reduction in period)
Other assets tax depreciable over 4 to 12 years
Tax depreciation can be disclaimed (useful planning
tool e.g. expiry of tax losses)
Key distinction between “technical improvements” and
repairs
Right to depreciate asset for lessee under finance
lease (specific conditions / recent development)
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Restructuring of property holdings
Mergers and de-mergers – tax neutrality?
Contributions in kind – tax deferral
Sale of property – taxation of gains
Recent developments
- greater certainty in merger/de-merger process
- potential to transfer tax losses
- abolition of transfer tax
- lack of transfer pricing rules between Slovak entities?
Provide greater flexibility in restructuring than before
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Real estate tax
From 1 January 2005 real estate tax on land due on the
value of the land
Real estate on buildings and flats based on m2
The tax rates are:
0.25% of the tax base for land
SKK 1 /m2 for buildings and flats
the rates can be increased by the municipality although
flexibility is planned to be more limited from 1 January
2006
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VAT
Single VAT rate of 19%
VAT automatically applied on sales of new buildings (5 years from
construction) and development land
Other transactions (sale of “old: buildings / rental) VAT exempt
Option to charge VAT on otherwise exempt transactions ( in the
case of leases only if counterparty is VAT registered)
Capital goods scheme if change of use (exempt / Vatable)
supplies) in 10 year period
Voluntary registration available if intend to make taxable supplies
Slovak authorities generally good at refunding VAT
Timing of VAT registration crucial since VAT incurred on services
pre registration is not recoverable
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The future
What will happen to corporate tax rates?
Is zero real estate transfer tax sustainable?
Are thin capitalisation rules gone for ever?
When will Slovakia get tough on transfer pricing?
Will withholding tax be reintroduced on dividends?
Will we have two rates of VAT again?
More complex acquisition and funding structures
inevitable?
Think about planning opportunities now because they
may not be available tomorrow
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Presenter’s contact details
Mark Gibbins
KPMG Slovensko Advisory, k.s.
+421 2 599 84 111
MarkGibbins@kpmg.sk
www.kpmg.com
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